As they say excess of everything is bad so is it with loans! Loans per se are not good or bad; their impact on the financial health will depend on how they are used and under what circumstances does one take a loan. Is a loan taken due to a necessity after being fully aware of the responsibilities that go along with a loan or is it taken just mindlessly? Does the borrower have the discipline to repay it on time? Is the borrower over leveraged; which means does he have too many EMIs to pay which can make him struggle each month with his payments? A loan can pave a way for a better future like in the case of a higher education loan; on the other had a personal loan procured just on a whimsical fancy could spell trouble.
Loans: The Good
As we said above, the reason a loan is taken and then how responsible one is towards repaying it determines whether they are good or not for your health. Loans help in fulfilling one’s dreams and can help one in buying a house or a car or meet a medical exigency and so on. All loans have to be repaid; that is the basic factor which can and should never be overlooked. Loans that are taken after considering all these aspects and the repayment capacity by the borrower can actually be good for the financial health. A well serviced loan that is served till the full term can help create a good credit trail which will help the borrower have a healthy credit rating and which can be a good thing for multiple reasons. A healthy credit score allows one to get a credit card or take a loan (in future) if required and can also influence the chance of getting a job. Some loans can actually help in improving one’s financial health in future. An example of this could be an education loan which can help one become employable or a business loan which can help one create wealth.
Loans: The Bad
Above we saw how loans can actually be good for your financial health or can help you better your financial health. Now we look at the other aspect; how they can be bad if the user is not careful. As is common knowledge that loans have to be repaid in equal monthly installments, whether one pays them through cheque or through a debit mandate there is particular date every month by which they must be paid. If the borrower does not do so then he/she attracts a penalty for late payment apart from a negative impact on the credit rating. So if the borrower is irresponsible he/she can harm himself financially because of the loss incurred due to levying of a penalty. Another aspect of this behavior is a negative impact on the credit score which could hamper you chances of borrowing in the future when you require a loan.
Let us look at another way in which a loan can be bad for your financial health. Whenever one applies for a loan they prospective lender will assess the credit worthiness of the applicant, for which they look at the CIR. For low scores they refuse the loan outright. However, it is possible to get a loan for low CIBIL score too if one approaches a private money lender or a co-operative bank. This is something which is highly avoidable as these loans are available at much higher rates which itself is bad for your financial health. Apart from that there is a serious and potent threat of such a person falling in a debt trap. The CIR gives a peek into a financial health, so if the CIR reveals that one is not in a position to service more debt than one should pay heed to it rather than trying to work around it.
Personal loans are easy to get as they can be used for any purpose which makes them prone to misuse too. These loans are expensive too; so if you are taking a personal loan then be absolutely sure about its need and your capacity to repay it. Though the lender will make the required enquiries into your CIR; you should also check your credit health by looking at your CIBIL rating online before making any application. This will prevent you from making any rash decision and can help you in assessing your credit health too!
So we come back to our original thought…..loans are just a product that is offered by financial institutions. They can be good or bad for your financial health depending what use to put them to and how responsible you are as a borrower.